Criminal action is expected for JPMorgan in Madoff case

JPMorgan Chase and federal authorities are nearing settlements over the bank's ties to Bernard L. Madoff, striking tentative deals that would involve roughly $2 billion in penalties and a rare criminal action. The government will use a sizable portion of the money to compensate Mr. Madoff's victims.

The settlements, which are coming together on the anniversary of Mr. Madoff's arrest at his Manhattan penthouse five years ago on Wednesday, would fault the bank for turning a blind eye to his huge Ponzi scheme, according to people briefed on the case who were not authorized to speak publicly.

A settlement with federal prosecutors in Manhattan, the people said, would include a so-called deferred-prosecution agreement and more than $1 billion in penalties to resolve the criminal case. The rest of the fines would be imposed by Washington regulators investigating broader gaps in the bank's money-laundering safeguards.

The agreement to deferred prosecution would also list the bank's criminal violations in a court filing but stop short of an indictment as long as JPMorgan pays the penalties and acknowledges the facts of the government's case. In the negotiations, the prosecutors discussed the idea of extracting a guilty plea from JPMorgan, the people said, but ultimately chose the steep fine and deferred-prosecution agreement, which could come by the end of the year.

Until now, no big Wall Street bank has ever been subjected to such an agreement, which is typically deployed only when misconduct is severe. JPMorgan, the authorities suspect, continued to serve as Mr. Madoff's primary bank even as questions mounted about his operation, with one bank executive acknowledging before the arrest that Mr. Madoff's "Oz-like signals" were "too difficult to ignore," according to a private lawsuit.

JPMorgan, which declined to comment for this article, has repeatedly said that "all personnel acted in good faith" in the Madoff matter. No one at JPMorgan has been accused of wrongdoing and the bank was not the only one to miss Mr. Madoff's fraud, which duped regulators and clients for decades.

In recent months, the bank has emphasized that it is scaling back businesses that could be vulnerable to money laundering and cutting ties to certain clients.

Jamie Dimon, the bank's chief executive, made a reference to the settlement talks at an industry conference on Wednesday, saying: "You read about Madoff in the paper the other day. We have to get some of these things behind us so we can do our job."

The looming settlements would come on the heels of JPMorgan's reaching a record $13 billion settlement over its sale of troubled mortgage securities before the financial crisis.

The scrutiny has taken a toll on JPMorgan, undercutting its leverage in negotiations and casting the bank as a symbol of Wall Street risk-taking. That stigma also sapped the influence that JPMorgan once used to shape policy in Washington, people briefed on the matter said, where regulators are increasingly skeptical of the bank's lobbying.

Although JPMorgan still wields some sway in Washington — it held more meetings with regulators on the so-called Volcker Rule than any other bank, according to the Sunlight Foundation — the bank's $6 billion trading loss in London last year became a flash point in the process and inspired regulators to strengthen the rule, a restriction on risky trading that was approved this week.

Facing the scrutiny, JPMorgan and its top executives directed billions of dollars to new compliance measures and vowed to adopt a conciliatory tack with federal authorities. The bank also embarked on a tour of contrition that featured Mr. Dimon holding town-hall-style meetings with regulators.

Of all its legal problems, the Madoff case appears to be among the biggest threats because of the criminal element. The deferred-prosecution agreement, the people said, is expected to fault JPMorgan for a "programmatic violation" of the Bank Secrecy Act, which requires banks to maintain internal controls against money laundering and to report suspicious transactions to the authorities.

The bank is also planning to settle with the federal Comptroller of the Currency and a unit of the Treasury Department, which are scrutinizing broader breakdowns in JPMorgan's detection of suspicious transactions routed through the bank. In addition to focusing on JPMorgan's ties to Mr. Madoff, regulators from the comptroller's office have also examined the safeguards at JPMorgan's private banking unit in Asia and within the so-called correspondent banking business, in which it relies on foreign institutions to process transactions overseas.

The comptroller's office, the Treasury and the United States attorney's office in Manhattan all declined to comment.

The Madoff case could have turned out worse for JPMorgan. In recent weeks, the federal prosecutors in Manhattan debated whether to demand that JPMorgan plead guilty to a criminal violation of the Bank Secrecy Act, the people briefed on the matter said.

The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron's accounting firm, Arthur Andersen, which went out of businesses after its 2002 conviction, taking 28,000 jobs with it. Ever since, prosecutors have increasingly relied on deferred-prosecution agreements, which rebuke companies without threatening their health. Although a Wall Street bank has never faced a deferred-prosecution agreement, according to a University of Virginia Law School database, Wachovia and the banking arm of American Express have entered into such deals.

The agreements, however, have fueled concern that some banks, having grown so large and interconnected, are too big to indict.

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Preet Bharara, the United States attorney in Manhattan whose office is handling the JPMorgan case, has raised similar concerns. "I don't think anyone is too big to indict — no one is too big to jail," he said in a recent speech.

In the case of JPMorgan, the nation's biggest bank, his office discussed the potential ramifications of criminal charges with the comptroller's office, which is required to monitor the bank's stability, the people said. The comptroller's office assured the prosecutors that it would not stand in the way of the charges. And Mr. Bharara's office concluded that the bank could withstand a criminal charge.

But ultimately, prosecutors decided that a deferred-prosecution agreement was more fitting to a case that began as a civil investigation. Criminal authorities have a higher burden of proof than their civil regulatory counterparts, having to show a legal violation "beyond a reasonable doubt" rather than just a "preponderance of the evidence" standard in civil cases.

The government's case against JPMorgan would most likely center on its failure to file a so-called suspicious activity report about Mr. Madoff. While the bank alerted the authorities in Britain to concern about Mr. Madoff, it did not sound the alarms with American regulators.

A statement of facts that would underpin the deferred-prosecution agreement will most likely cite a series of internal JPMorgan emails suggesting that employees had concerns that never made it to Washington. Some of the emails surfaced in a separate lawsuit that Irving H. Picard — the trustee trying to recoup money on behalf of Mr. Madoff's victims — filed against JPMorgan in 2010. Mr. Picard, who has recovered $9.5 billion for victims, sued the bank for $6.4 billion, accusing it of "aiding and abetting" Mr. Madoff.

JPMorgan has denied Mr. Picard's accusations. A federal appeals court tossed out his lawsuits against JPMorgan and other banks.

JPMorgan's relationship with Mr. Madoff spanned more than two decades, from 1986 to the time of his arrest in 2008. JPMorgan served as his primary bank, Mr. Picard said, collecting fees from Mr. Madoff's brokerage firm, which moved billions of dollars through an account at the bank.

By 2006, concerns began to mount within the bank. "I do have a few concerns and questions," one JPMorgan employee wrote in February 2006 after studying some of Mr. Madoff's trading records, according to an email cited in the lawsuit. "All trades are generated by Madoff's black box."

Mr. Madoff is serving a 150-year sentence after pleading guilty to operating the scheme.